| Pricing: Understanding and Capturing Customer Value 291

Chapter 10 | Pricing: Understanding and Capturing Customer Value 291

Author Setting the right price Comment

Major Pricing Strategies is one of the marketer’s (pp 291–300) most difficult tasks. A host of factors

The price the company charges will fall somewhere between one that is too high to produce come into play. But finding and implementing the right price strategy

any demand and one that is too low to produce a profit.

Figure 10.1 summarizes the ma-

is critical to success. jor considerations in setting price. Customer perceptions of the product’s value set the ceil- ing for prices. If customers perceive that the product’s price is greater than its value, they will not buy the product. Product costs set the floor for prices. If the company prices the product below its costs, the company’s profits will suffer. In setting its price between these two extremes, the company must consider several internal and external factors, including competitors’ strategies and prices, the overall marketing strategy and mix, and the nature of the market and demand.

Figure 10.1 suggests three major pricing strategies: customer value-based pricing, cost- based pricing, and competition-based pricing.

Author Like everything else in Comment

Customer Value-Based Pricing

marketing, good pricing starts with customers and their

In the end, the customer will decide whether a product’s price is right. Pricing decisions, like perceptions of value.

other marketing mix decisions, must start with customer value. When customers buy a product, they exchange something of value (the price) to get something of value (the bene- fits of having or using the product). Effective, customer-oriented pricing involves under- standing how much value consumers place on the benefits they receive from the product and setting a price that captures this value.

Customer value-based pricing

Customer value-based pricing uses buyers’ perceptions of value, not the seller’s

Setting price based on buyers’ cost, as the key to pricing. Value-based pricing means that the marketer cannot design a perceptions of value rather than on the

product and marketing program and then set the price. Price is considered along with all seller’s cost.

other marketing mix variables before the marketing program is set. Figure 10.2 compares value-based pricing with cost-based pricing. Although costs are an important consideration in setting prices, cost-based pricing is often product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Marketing must then con- vince buyers that the product’s value at that price justifies its purchase. If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits.

Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. The targeted value and price drive decisions about what costs can be incurred and the re- sulting product design. As a result, pricing begins with analyzing consumer needs and value perceptions, and the price is set to match perceived value.

It’s important to remember that “good value” is not the same as “low price.” For exam- ple, a Steinway piano—any Steinway piano—costs a lot. But to those who own one, a Stein- way is a great value: 4

A Steinway grand piano typically runs anywhere from $40,000 to $165,000. The most popular model sells for around $72,000. But ask anyone who owns a Steinway grand piano, and they’ll tell you that, when it comes to Steinway, price is nothing; the Stein- way experience is everything. Steinway makes very high quality pianos; handcrafting

FIGURE | 10.1

Considerations in Setting Price

Customer

Other internal and external

of value

Competitors’ strategies and prices

costs

If customers perceive that a product’s price is greater than its value, they won’t buy it. If the

Marketing strategy, objectives,

company prices a product below its costs, profits

Price ceiling

and mix

Price floor

will suffer. Between the two extremes, the “right"

No profits below pricing strategy is one that delivers both value to

No demand above

Nature of the market and demand

this price the customer and profits to the company.

this price

292 Part Three | Designing a Customer-Driven Strategy and Mix